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Expanded UI benefits are set to expire on September 6, 2021. Although 26 states already ended expanded UI benefits in June and July, on August 19 the Biden Administration reaffirmed that states can use their American Rescue Plan allocations to continue expanded UI benefits should they deem them necessary given local labor and public health conditions. What should a Governor do? Below we summarize what we have learned about the benefits and costs of UI over the last 10 years.
Unemployment Insurance is playing an important role in boosting spending, stimulating economic activity during the COVID recession. We document in our latest report that the benefits of UI are consistently large, and even larger for low-liquidity and low income households. Regardless of the economic conditions, families exhibit a high marginal propensity to spend their unemployment insurance benefits. In fact, UI does a particularly good job of preventing spending cuts among low-liquidity and low-income families which, in turn, reduces negative impacts on the local business economy. During COVID we document a large spending response out of UI, owing to higher benefit levels and the concentration of job losses among lower-income workers. Indeed UI benefits boosted the spending of jobless workers, even when the spending of the employed had fallen considerably. These spending impacts help create jobs, providing a boost to the economy that is still recovering.
Conversely, our previous research on UI prior to the pandemic (JPMCI report, academic paper) suggests that spending drops considerably when UI benefits expire. Thus, it is reasonable to expect that we might observe a spending drop among jobless workers who lose their UI benefits in September.
If the benefits of UI are consistently large, what about the costs?
On September 6, roughly one-third of UI benefit recipients will lose the supplement but still receive weekly benefits. We have documented that UI supplements do not appear to play a large role in deterring people from returning to work. Fluctuations in job finding among UI recipients when UI supplements are turned on and off are small compared to fluctuations we observe from other factors. Policymakers should consider additional reasons why employers state they are having a difficult time with employees returning to the office including the ongoing public health risk, childcare constraints, as well as insufficient pay or benefits.
The lion’s share of jobless workers—roughly two-thirds, including the long-term unemployed and gig workers—will lose their benefits entirely, not just the supplements. The Pandemic Unemployment Assistance program, which expanded UI coverage to gig workers and other groups, has been a significant addition to the economic safety net during COVID as it represents roughly 40 percent of total claims. As we show, it is providing meaningful income insurance for workers who appear to be lower-income and younger than traditional UI recipients. That said, in prior work, we have documented a 38 percent increase in job-finding when jobless workers lose their UI benefits entirely. Thus allowing UI benefits to lapse entirely, may indeed nudge some recipients back to work, but those losing full benefits are likely to be lower-income, more financially vulnerable workers.
A recent paper helpfully compares in dollar terms the large spending drops against the small employment gains occurring in a number of states that turned off expanded benefits over the summer: UI benefits for workers fell by $278 per week while earnings rose by just $14 per week, offsetting only 5% of the loss in benefits. As a result, spending fell by $145 (20 percent) per week, as the loss of benefits led to a large immediate decline in consumption. According to our research, this sensitivity of spending to the drop in income is a predictable response for lower-income households, which makes up the bulk of that paper’s sample.
Unemployment benefits, along with three rounds of stimulus, have helped boost not just spending but also cash balances for jobless workers and households in general. After each round of stimulus, and when UI supplements were removed, we observe cash buffers depleting faster for families with lower liquidity or incomes and for jobless workers, respectively, showing the importance of targeted support.
As policymakers continue to evaluate the best action to ensure a successful and inclusive recovery – targeted income supports continue to be an essential part of buoying consumer spending and household finances and their continuation should be strongly considered.